The empire strikes back: E-hub fever rocks biz marketers

After years of watching start-up dot-coms gain footholds in their vertical marketplaces, America's biggest corporations are banding together to seize the Web for themselves.

Beginning last month with the announcement by the Big Three automakers of plans for an online supplier exchange, major manufacturers in at least a half-dozen industries have followed suit.

This represents an enormous shift in online business strategy, and raises major challenges for marketers and market makers:

How will marketing strategies adapt to automated purchasing hubs? Though e-marketplace executives say price won't be the only criteria on these online hubs, it remains difficult to build brand value in an e-marketplace.

"In a commodity market, you have to make yourself stand for something," said David Potts, VP-business development and product management for The CobaltGroup, an IT provider for the automotive industry.

"There has to be a compelling reason why you would choose one supplier over another, and much of that certainly stems from ongoing marketing communications."

What will happen to existing online vertical marketplaces? If the big buyers now start their own marketplace, can dot-com operations such as Commerx Inc.'s PlasticsNet.com, ChemConnect Inc., VerticalNet and e-Steel Corp. still thrive?

In the automotive industry, the Big Three are explicit that their new partnership signifies that "automakers won't cede the b-to-b market to Web players," said Alice Miles, president-Ford B2B and acting co-CEO of the Big Three's planned online supplier exchange.

Nick Earle, chief marketing officer, business-to-business, for Hewlett-Packard Co. likens the rise of big-business e-commerce to the big bang, where the dot-com start-ups are stars that form early, shine brightly, but are snuffed out early.

"The thing that brings order to a universe is gravity," Earle said. "So Chevron, or some other big company, comes up to form a vertical portal. It will create gravity, which will suck in the stars. Now, if you want to create a mega black hole, you go to your competitors and make them partners. Ford, GM or Chrysler saw that, by sharing, it was game over. All the competitors will go out of business, and we'll share the portal."

For their part, third-party e-marketplaces don't buy that kind of dramatic rhetoric and are talking tough themselves.

"The automakers have a lot of plans," scoffed Jim Zuffoletti, director-market making at FreeMarkets.com, a Pittsburgh-based horizontal auction site. "I would ask, 'What have you already done?' If six months from now, they're still talking about plans, then that's your indication of how much success they're going to have."

WHO WILL BUILD THEM?

Zuffoletti may have an ax to grind, seeing that GM jilted FreeMarkets and selected Commerce One to build the online supplier exchange. But what is clear is that a battle has been joined between the dot-coms and the once not-coms, and trillions of dollars are at stake.

A February report from Forrester Research, Cambridge, Mass., predicted that b-to-b e-commerce would reach $2.7 trillion annually by 2004, representing 17% of total b-to-b commerce. Of that $2.7 trillion in e-commerce, $1.4 trillion, or 53%, will be conducted on e-marketplaces in a range of industries, the report says.

The question is will these e-marketplaces be the kind founded by consortiums of manufacturers, by independent, third-party companies or by a combination of both? In the wake of the Big Three's announcement, other corporations have come together--on customer-facing and supplier-facing initiatives--to create online joint ventures. Among the most prominent:

DuPont, Cargill and Cenex Harvest States Cooperative announced earlier this month that they plan to create an agricultural industry e-commerce site. Called Rooster.com, it is intended to allow farmers to market their crops and to buy fertilizer, pesticides and other farm supplies via the Web. It will compete against established third-party sites, such as farms.com.

Sears, Roebuck & Co. and French retailer Carrefour announced earlier this month a joint venture to form an online purchasing site where the retailers will buy about $80 million in combined purchases.

In conjunction with Grocery Manufacturers of America, Kraft Foods, H.J. Heinz Co. and other major food companies announced they planned to create an industrywide e-marketplace to buy more than $200 billion worth of goods from suppliers.

The Big Three's as-yet-unnamed online supplier exchange, which the automakers are calling "Newco," is at this point the most ambitious of all the planned exchanges.

Eyeing a share of this commerce well beyond the automotive industry, Newco has aggressive plans to become a massive purchasing hub for industry in general. This ramping up for such an endeavor will be funded in part by an initial public offering of Newco.

"Initially, our focus will be succeeding in the automotive vertical for credibility on Wall Street," said Alan Turfe, executive director-GM TradeXchange and another co-CEO of the Newco. "Once we establish that credibility in the automotive vertical, we plan on going into other vertical industries."

Turfe, Ford's Miles and Newco's third co-CEO, Peter Weiss, project manager of e-Extended Enterprise at DaimlerChrysler Corp., say they plan to spin off Newco and take the company public as soon as possible.

They want Newco to function as an independent e-marketplace, but the Big Three will have designed the site and will maintain a hefty ownership stake in the project.

Some b-to-b observers say the PlasticsNets and ChemConnects of the world will be driven out of business. Others say the survivors will ally with the Newco. And still others say even a successful Newco, while it may cause consolidation among the third-party e-marketplaces, won't eliminate the need for them.

Brad Hafer, VP-corporate development for SupplierMarket.com, an e-marketplace for gears, bolts and other manufactured parts, isn't exactly quaking in his boots.

"We believe strongly that this neutrality is necessary for a successful marketplace to become and stay a leader," he wrote in an e-mail.

"The Big Three's online exchange is buyer focused, targeting reduction in direct material costs for buyers. Therefore, suppliers may be hesitant to participate in the exchange."

Adds Steve Kafka, an analyst with Forrester, "They'll never create one single industrial 'mall of America,' the one in Minnesota notwithstanding. But even if they do create a super huge mega-mall, that doesn't mean we won't have strip malls to serve more specialized needs."

THE CHAOS THEORY

Garrett Gee, business manager-plastics at Kline & Co., a Little Falls, N.J.-based consultancy, has a word for the next couple of years surrounding e-marketplaces.

"Chaos," he said with a chuckle. "It's going to be a three-phase adoption process: storming, norming and performing."

He explains, "In the storming phase, people are going to scramble trying to figure it out. The solutions will be unclear. IT providers will be confusing people with what kind of infrastructure they should be using."

In Gee's view, next comes the norming phase. "This is when companies will begin to accept it and understand it," he said. In this period, companies will settle on approaches to balancing their own Web initiatives and e-marketplaces, he explained.

In the "performing" phase, e-business will just become business. The shift will be spurred mainly by the cost-savings of e-commerce, which Kline & Co. estimates will be between $7 and $125 per transaction.

Once the "performing" phase begins in about five years, Gee said most companies will use some combination of direct e-commerce on their own extranets and e-commerce that goes through an e-marketplace. He expects that most companies will sell 70% of their products direct, either through e-commerce or traditional means.

In particular, Gee said, most companies will maintain control of their biggest customers and not cede that to a third-party e-marketplace.

NOT ALL WILL SURVIVE

Forrester has a slightly different perspective. By 2004, it projects that 17% of all online b-to-b trade will go through e-marketplaces. The percentage will vary from industry to industry. At one end of the spectrum, the computer and electronics industry will conduct 40% of online trade through e-marketplaces; at the other, heavy industry will conduct just 3% of its online trade through e-marketplaces.

Neutral e-marketplaces will thrive in fragmented industries, such as plastics, chemicals and steel, Forrester projects.

E-marketplaces controlled by corporations will bloom in industries--such as automotive--that are dominated by a few key players, Forrester says.

E-marketplaces founded by dot-com start-ups will thrive, Forrester says, in fragmented industries such as steel, plastics and chemicals. Third-party sites such as e-Steel, PlasticsNet and ChemConnect already have strong positions in these vertical industries.

ANALYZING BUSINESS MODELS

Most observors expect a wave of mergers, even though new Web hubs continue to sprout almost daily. Giga Information Group, Cambridge, Mass., expects the number to explode to 10,000 by year's end.

Ed Matheny, president of Atlantic Consulting, Decatur, Ga., argues the focus of most e-marketplaces is misguided.

"There's all this focus on procurement, procurement, procurement; auction, auction, auction; exchange, exchange, exchange," he said. "I think the real challenge and the real opportunity is not taking the cost out of transactions, but in finding new ways to manage relationships with customers and finding ways to add more value to what we're already doing for them."